Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market

Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market

Ryan Severino: Office Cap Rates Down to 7.4% In Limited Transaction Market.

(The following is adapted from from a portion of Reis’s latest quarterly Capital Markets Briefing, originally delivered by Ryan Severino, PhD, on 8/25/2010.)


As the slide above illustrates, the mean cap rate for office properties decreased dramatically in the second quarter, from 8.2% in the first quarter to 7.4% in the second quarter.  Mean office cap rates had been steadily increasing since the third quarter of 2008, before fluctuating a bit throughout 2009. Much like apartment, the limited and selective transaction market causes quarterly changes in mean cap rates to be somewhat unpredictable and volatile.  This quarter’s 80 basis point decline, while not unwelcome, epitomizes this ongoing phenomenon. The average price per square foot and the mean sales price increased also increased versus last quarter, even though the number of buildings transacted declined. Therefore, we can conclude that this quarter’s rather steep decline in cap rates is likely due to an increase in the quality of buildings that traded this quarter versus the quality of those traded in recent quarters past. Sentiment in the marketplace is improving, but it is important to understand that a changing mix of buildings from quarter to quarter can have a significant impact on the mean cap rate and we should not confuse this with a change in sentiment in the market.

For better guidance, it is instructive to examine the trend in the 12-month rolling cap rate, which shows that cap rates for the office market might–emphasis on might–have peaked last quarter. It is still too early to tell for certain if we have reached the peak in cap rates for office, especially because of the effect that this quarter’s decline in cap rates is having on the 12-month rolling rate. Nonetheless, this quarter’s decline in the 12-month rolling cap rate is the first time that we have observed a decline in almost two years, since the third quarter of 2008. Although it only represents a slight decline, it is the first indication of stabilization in pricing that we have observed in the office transaction market. The trajectory of cap rates for the remainder of the year will largely depend upon the trend in fundamentals and their impact on sentiment in the market throughout the latter half of the year. Office fundamentals have not yet begun to improve, but if they do during the remainder of the year that could provide support and enthusiasm for office transactions.

Impact of Lease Accounting Changes to Affect Long-Term Leases

Proposed new accounting standards have been drafted in order to push lease liabilities back onto corporate balance sheets. Such a change would represent a major shift for companies that have typically favored the off-balance-sheet treatment of operating leases, and it could have a significant impact on corporate decisions to lease or purchase real estate in the future.

The proposed guidelines are a joint initiative by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board to create a uniform global standard and greater corporate transparency in lease accounting procedures. The most recent draft issued Aug. 17 would establish one method of accounting that requires firms to recognize all lease liabilities and assets on their corporate financial statements.

Another key component is that companies would be required to record the lease value or rent commitment over the entire lease term, including renewal options. Although the intent is to stop off-balance-sheet activity, the changes would add significant weight to corporate balance sheets. Continue reading “Impact of Lease Accounting Changes to Affect Long-Term Leases”

Commercial Property Market Coming Back?

There seems to be some indication that the long-awaited commercial property market crash may not happen. US Banks are reporting that 90 day delinquencies are leveling and that more liquidity is coming into the market enabling delinquent loans to be refinanced. Rankin Commercial Properties indicates that institutional investors are coming back into the CRE market once again.

Mark Heschmeyer, writing in the CoStar Advisor, in an article titled, “US Banks Report CRE Loan Troubles Subsiding Amid Strong Quarterly Earnings” reports that: Continue reading “Commercial Property Market Coming Back?”